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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended June 30, 2002





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




FOR THE TRANSITION PERIOD FROM
                     TO





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Commission File Number 0-23223








CURAGEN CORPORATION


(Exact name of registrant as specified in its charter)





Delaware 06-1331400

06-1331400


(State or other jurisdiction of (I.R.S. Employer incorporation or organization)

(I.R.S. Employer Identification No.)





555 Long Wharf Drive, 11th Floor, New Haven, Connecticut 06511


(Address of principal executive office)
                                        
                (Zip Code)





Registrants telephone number, including area code:    (203) 401-3330





Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x        No  ̈





The number of shares outstanding of the Registrants common stock as of July 26, 2002 was 48,951,671.





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CURAGEN CORPORATION AND SUBSIDIARY





FORM 10-Q





INDEX





Page No.Part I  Financial Information:Item 1.

Financial StatementsCondensed Consolidated Balance Sheets, June 30, 2002 (unaudited) and December 31, 2001

3Condensed Consolidated Statements of Operations, for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited)

4Condensed Consolidated Statements of Cash Flows, for the Six Months Ended June 30, 2002 and 2001 (unaudited)

5Notes to Condensed Consolidated Financial Statements (unaudited)

6-7Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

8-13Part II  Other Information:Item 4.

Submission of Matters to a Vote of Security Holders

14Item 6.

Exhibits and Reports on Form 8-K

14Signatures

15





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|

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CURAGEN CORPORATION AND SUBSIDIARY





CONDENSED
CONSOLIDATED
BALANCE SHEETS


(in thousands, except par value and share data)





June 30,2002


December 31,2001(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
92,385


$
235,618Short-term investments


222,621



272,731Marketable securities


140,361



Cash and investments


455,367



508,349Income taxes receivable


1,891



856Other current assets


749



676Prepaid expenses


3,189



2,810Total current assets


461,196



512,691Property and equipment, net


32,804



21,907Notes receivablerelated parties


140



190Other assets


109



131Intangible assets, net


3,394



3,782Total assets

$
497,643


$
538,701LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
3,547


$
3,476Accrued expenses


3,545



2,585Accrued payroll and related items


1,945



1,924Interest payable


3,750



3,750Deferred revenue


2,506



2,025Current portion of obligations under capital leases


2,529



2,800Total current liabilities


17,822



16,560Long-term liabilities:Convertible subordinated debt


150,000



150,000Obligations under capital leases, net of current portion


935



2,297Total long-term liabilities


150,935



152,297Commitments and contingencies:Minority interest in subsidiary


12,257



13,899Stockholders equity:Common Stock; $.01 par value, issued and outstanding 48,947,121 shares atJune 30, 2002, and 48,729,319 shares at
December 31, 2001


490



487Additional paid-in capital


481,386



480,050Accumulated other comprehensive income


998



Accumulated deficit


(166,245
)


(124,592
)Total stockholders equity


316,629



355,945Total liabilities and stockholders equity

$
497,643


$
538,701





See accompanying notes to condensed consolidated financial statements




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CURAGEN CORPORATION AND SUBSIDIARY





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)


(unaudited)





Three Months Ended June 30,


Six Months EndedJune 30,2002


2001


2002


2001Revenue:Collaboration revenue

$
3,659


$
6,240


$
8,471


$
11,901Total revenue


3,659



6,240



8,471



11,901Operating expenses:Research and development


22,238



16,339



42,372



28,473General and administrative


5,253



4,636



11,187



9,159Total operating expenses


27,491



20,975



53,559



37,632Loss from operations


(23,832
)


(14,735
)


(45,088
)


(25,731
)Interest income, net


473



3,827



879



8,722Loss before income taxes and minority interest in subsidiary loss


(23,359
)


(10,908
)


(44,209
)


(17,009
)Income tax benefit


350



300



885



800Minority interest in subsidiary loss


988



329



1,672



574Net loss

($
22,021
)

($
10,279
)

($
41,652
)

($
15,635
)Basic and diluted net loss per share

$
(0.45
)

$
(0.21
)

$
(0.85
)

$
(0.33
)Weighted average number of shares used in computing basic and diluted net loss per share


48,897



48,556



48,851



47,731





See accompanying notes to condensed consolidated financial statements.




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CURAGEN CORPORATION AND SUBSIDIARY





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Six Months Ended June
30,2002


2001Cash flows from operating activities:Net loss

($
41,652
)

($
15,635
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


4,542



3,250Non-monetary compensation


6



453Stock-based 401(k) employer plan match


538



402Minority interest


(1,672
)


(574
)Changes in assets and liabilities:Income taxes receivable


(1,035
)


(800
)Other current assets


(73
)


161Prepaid expenses


(379
)


(341
)Other assets


13



16Accounts payable


71



(1,212
)Accrued expenses


960



(268
)Accrued payroll and related items


20



36Deferred revenue


481



(636
)Net cash used in operating activities


(38,180
)


(15,148
)Cash flows from investing activities:Acquisitions of property and equipment


(15,017
)


(4,812
)Payments for intangible assets


(13
)


(33
)Repayments from related parties


50



112Net inflows from purchases and maturities of short-term investments


50,110



147,535Net outflows from purchases and maturities of marketable securities


(139,363
)


Net cash (used in) provided by investing activities


(104,233
)


142,802Cash flows from financing activities:Payments on capital lease obligations


(1,632
)


(1,692
)Proceeds from sale-leaseback of equipment






901Proceeds from issuance of Common Stock






85,000Payments of stock issuance costs






(119
)Payments of financing costs


(12
)


(12
)Proceeds from exercise of stock options


824



618Proceeds from exercise of warrants






62Net cash (used in) provided by financing activities


(820
)


84,758Net (decrease) increase in cash and cash equivalents


(143,233
)


212,412Cash and cash equivalents, beginning of period


235,618



329,495Cash and cash equivalents, end of period

$
92,385


$
541,907Supplemental cash flow information:Interest paid

$
4,747


$
4,922Supplemental schedule of non-cash financing transactions:Obligations under capital leases

$
0


$
901





See accompanying notes to condensed consolidated financial statements




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CURAGEN CORPORATION AND SUBSIDIARY





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





|1. |  | Basis of Presentation
|-- |  | ---------------------




The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly our
consolidated financial position, results of operations and cash flows. Interim results are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements include CuraGen
Corporation and our majority-owned subsidiary, 454 Corporation (the Company), and accordingly, all material intercompany balances and transactions have been eliminated.





The June 30, 2001 and December 31, 2001 condensed consolidated financial statements have been reclassified to conform to the classifications used in 2002.
All dollar amounts are shown in thousands, except par value and per share data.





The accompanying
condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001.





|2. |  | Marketable securities
|-- |  | ---------------------




During the second quarter of 2002, the Company purchased marketable securities consisting primarily of debt securities, which are classified as available-for-sale as required by Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value with the unrealized gains and losses reported in stockholders
equity under the caption Accumulated Other Comprehensive Income (see Note 3). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on debt securities,
amortization of premiums and accretion of discounts is included in interest income. The cost of securities sold, if any, is based on the specific identification method.





The amortized cost, gross unrealized gains and losses and estimated fair value based on published closing prices of securities at June 30, 2002, by
contractual maturity, are shown below.





Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value(in thousands)Marketable SecuritiesDue in one year or less

$
5,194

$
19




$
5,213Due in one through three years


37,242


417





37,659Due in three through five years


27,216


98


28


27,286Mortgage backed and asset backed securities


69,711


492





70,203Total Marketable Securities

$
139,363

$
1,026

$
28

$
140,361





For the three and six months ended June 30, 2002
and 2001, the Company did not realize any material gains or losses on securities sold.




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CURAGEN CORPORATION AND SUBSIDIARY





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(unaudited)







|3. |  | Accumulated Other Comprehensive Income
|-- |  | --------------------------------------




Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, (SFAS 130) requires reporting and
displaying of comprehensive income and its components. In accordance with SFAS 130, the accumulated balance of other comprehensive income is disclosed as a separate component of stockholders equity and is composed of unrealized gains and
losses on marketable securities. As of June 30, 2002, accumulated other comprehensive income was $1.0 million as compared to $0 for the corresponding period in 2001.




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CURAGEN CORPORATION AND SUBSIDIARY





MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





This Managements Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001 should be read in conjunction with the sections
of our audited condensed consolidated financial statements and notes thereto as well as our Managements Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K
for the year ended December 31, 2001.





Overview





We are a genomics based pharmaceutical development company. We apply proprietary functional genomic technologies, bioinformatic systems, and disease expertise to discover
genes and proteins, and to determine how these genes and proteins function in the context of disease. We use this information to develop protein, antibody, and small molecule therapeutics to treat metabolic diseases, cancer, inflammatory diseases,
and central nervous system disorders. We are developing protein drugs on our own behalf, and have established alliances to develop antibody drugs across all disease areas, and to develop small molecule drugs to treat obesity and diabetes. We are
currently pursuing additional collaborations to develop small molecule drugs across other disease areas. We were incorporated in November 1991 and, until March 1993, were engaged primarily in organizational activities, research and development of
our technology, grant preparation and obtaining financing. We have incurred losses since inception, principally as a result of research and development and general and administrative expenses in support of our operations. We anticipate incurring
additional losses over the next several years as we expand our drug discovery and development operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our ability to earn revenues and
become profitable is dependent primarily on our ability to successfully develop and commercialize pharmaceutical products based upon our expertise in genomics, our technologies, and our drug discovery and development programs. Accomplishing this
goal also depends in part on our ability to maintain our existing strategic alliances, and on our ability to establish new alliances to aid us in developing and commercializing small molecule therapeutics. We cannot guarantee that any such strategic
alliances, either new or existing, will be successful. In June 2000, we established a majority-owned subsidiary, 454 Corporation (454), to develop novel technologies for rapidly and comprehensively analyzing entire genomes. We expect
that 454 will commercialize these products upon their development, which may be a future source of revenues for us.





Our failure to successfully develop and market pharmaceutical products over the next several years would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated
for us from commercial sales of products developed through the application of our technologies and respective expertise are not expected for several years, if at all.




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Critical Accounting Policies





The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues
and expenses and as such, actual results may differ from these estimates under different assumptions or conditions.





Our critical accounting policies, which are more fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001, include the following:





Revenue RecognitionWe have entered into certain collaborative research agreements that provide for the partial or
complete funding of specified projects in exchange for access to, and certain rights in, the data discovered under the related projects. Revenue is recognized based upon work performed or upon the attainment of certain benchmarks or milestones
specified in the related agreements. We have also entered into a collaborative research exchange agreement in which services and technology access are exchanged between the collaborative partners. Revenues and expenses under this exchange agreement
are based upon the fair value of the work performed by each collaborative partner. Deferred revenue arising from payments received from collaborative agreements is recognized as income when earned.





Cash and InvestmentsWe consider investments readily convertible into cash, with an original maturity of three months or less,
to be cash equivalents. Investments with an original maturity greater than three months but less than one year are considered short-term investments. The carrying amount of the investments approximates fair value due to their short maturity.
Investments with an original maturity greater than one year are considered marketable securities and are classified as available-for-sale securities, and are carried at fair value with the unrealized gains and losses reported in stockholders
equity under the caption Accumulated Other Comprehensive Income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on debt securities, amortization of premiums
and accretion of discounts is included in interest income. The cost of securities sold, if any, is based on the specific identification method.





Property and EquipmentProperty and equipment are recorded at cost. Equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using
the straight-line method. Equipment under capital leases is amortized over the shorter of the estimated useful life or the terms of the lease, using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated
life or the term of the lease, using the straight-line method. Equipment which is not yet placed in service, or buildings and leasehold improvements the construction of which is not yet completed, are classified as construction in progress and
included in property and equipment. Under accounting principles generally accepted in the United States of America, land is not required to be depreciated.





Patent Application CostsCosts incurred in filing for patents are charged to operations, until such time as it is determined that the filing will be successful. When it becomes evident with
reasonable certainty that an application will be successful, the costs incurred in filing for patents will begin to be capitalized. Capitalized costs related to successful patent applications will be amortized over a period not to exceed twenty
years or the remaining life of the patent, whichever is shorter, using the straight-line method.





Stock-Based
CompensationIn October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), which was
effective for us beginning January 1, 1996. SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and non-employees and encourages (but does not require) compensation cost to be measured based on the fair
value of the equity instruments awarded to employees. Companies are permitted to continue to apply Accounting Principles Board (APB) No. 25, which recognizes compensation cost based on the intrinsic value of the equity instruments
awarded. We will continue to apply APB No. 25 to our stock-based compensation awards to employees.




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Results of Operations





Three and Six Months Ended June 30, 2002 and 2001





Revenue.    Collaboration revenue for the three and six months ended June 30, 2002 was $3.7 million and $8.5 million, a decrease of $2.5 million and $3.4 million, or 40% and 29%, as compared to $6.2 million
and $11.9 million for the corresponding periods in 2001. Revenues in the three month period ended June 30, 2002 were primarily related to our collaborative arrangements with Abgenix, Inc. (Abgenix) and Bayer AG (Bayer), while
the same period in 2001 primarily included revenue from our collaborative arrangements with Abgenix, Bayer, and GlaxoSmithKline, Inc. (Glaxo). Revenues recorded in the six month period ended June 30, 2002 were primarily related to our
collaborative arrangements with Abgenix and Bayer while the same period in 2001 included revenue from our collaborative arrangements with Abgenix, Bayer, COR Therapeutics, Inc. (COR), and Glaxo. The decreases in revenue are primarily due
to the completion of the research portion of the collaborative arrangements with COR in the first quarter of 2001 and Glaxo in the fourth quarter of 2001.





The revenue we recognize under our collaborative arrangements is generally based upon work performed or the attainment of certain benchmarks specified in the related agreements. We have also entered
into a collaborative research exchange agreement in which services and technology access are exchanged between the collaborative partners. Revenues and expenses under this exchange agreement are based upon the fair value of the work performed by
each collaborative partner. Further revenue growth will be dependent upon our ability to enter into additional collaborations and strategic alliances, maintain and expand current collaborations, receive royalties and milestone payments from products
currently under development by our current and former collaborators and successfully develop and market products that may arise from our own internal program pipeline. We expect second half of 2002 collaborative revenues to decrease slightly from
corresponding 2001 levels, unless we enter into new agreements, or receive royalties and milestone payments from products currently under development by our current and former collaborative partners.





Operating Expenses.    Research and development expenses for the three and six months ended June 30, 2002 were
$22.2 million and $42.4 million, compared to $16.3 million and $28.5 million for the same periods in 2001. The increases of $5.9 million and $13.9 million, or 36% and 49%, were primarily attributable to increased internal research efforts and our
obligations to fulfill research requirements under existing collaborations and strategic alliances, which included payments for contractual services, increased equipment depreciation, and additional personnel costs. Future research and development
expenses are expected to continue to increase as our research and development facilities are expanded to accommodate our drug discovery and development efforts, as we continue advancing our products towards clinical development, and as the
operations of 454 continue to grow.





General and administrative expenses for the three and six months ended June
30, 2002 increased $0.6 million and $2.0 million, or 13% and 22%, to $5.2 million and $11.2 million as compared to $4.6 million and $9.2 million for the three and six months ended June 30, 2001. The increases were primarily attributable to higher
personnel and payroll costs, increases in expenses in connection with upgrades and expansion of our facilities and related increased rent expenses, as well as legal expenses in support of the development of our intellectual property portfolio. We
anticipate that general and administrative expenses will continue to increase in support of the advancement of our drug discovery and development efforts.





Interest Income, Net.    Net interest income for the three and six months ended June 30, 2002 of $0.5 million and $0.9 million decreased $3.3 million and $7.8 million, or 87%
and 90%, as compared to $3.8 million and $8.7 million for the same periods in 2001. Gross interest income for the three and six months ended June 30, 2002 of $3.0 million and $6.0 million decreased $3.5 million and $8.0 million, or 54% and 57%, as
compared to $6.5 million and $14.0 million for the same periods in 2001. The decreases in gross and net interest income were primarily due to lower cash and investment balances as a result of additional operating losses in support of our
research and development activities, acquisitions of additional property and equipment, interest paid to the holders of our convertible subordinated debt and declines in interest rates earned on our investments. Gross interest expense for the three
and six months ended June 30, 2002 of $2.6 million and $5.1 million represented a decrease of $0.1 million and $0.2 million, or 4% and 4%, as compared to $2.7 million and $5.3 million for the




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three and six months ended June 30, 2001. This was primarily a result of decreasing interest payments on various expiring capital leases. We expect gross interest expense to increase slightly in
the second half of 2002 in conjunction with the anticipated equipment financing for capital expenditures.





Income Taxes.    For the three and six months ended June 30, 2002, we recorded a Connecticut income tax benefit of $0.4 million and $0.9 million. We recorded this income tax benefit as a result of
Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for foregoing carryforward of a research and development
credit for state tax purposes. During 2002, we anticipate that the income tax benefit will be approximately $1.2 million, as we incur additional qualifying research and development costs. Realization of deferred tax assets is dependent on future
earnings, if any, the timing and amount of which are uncertain. Accordingly, valuation allowances in amounts equal to the deferred income tax assets have been established to reflect these uncertainties in all periods presented.





Net Loss.    For the three and six months ended June 30, 2002, we reported a net loss of $22.0
million and $41.7 million or $0.45 per share and $0.85 per share as compared to $10.3 million and $15.6 million or $0.21 per share and $0.33 per share for the same periods in 2001. The increases in net loss of $11.7 million and $26.1 million,
or 114% and 167%, were primarily due to additional research and development and general and administrative expenses in support of the advancement of our drug discovery and development efforts, and declines in collaboration revenue and gross interest
income. Since inception, we have incurred operating losses, and as of June 30, 2002, we had an accumulated deficit of $166.2 million. We have not paid any federal income taxes since inception.





Minority Interest in Subsidiary Loss.    Minority interest in subsidiary loss for the three and six months ended June 30, 2002, which is the
portion of 454s loss attributable to stockholders of 454 other than us, was $1.0 million and $1.7 million as compared to $0.3 million and $0.6 million for the same periods in 2001. The increases of $0.7 million and $1.1 million, or 233% and
183%, were primarily due to 454s increased purchases of laboratory supplies, increased equipment depreciation, and additional personnel costs. As the expected future level of 454s loss increases, we anticipate recording an increased
minority interest in subsidiary loss based upon the minority shareholders ownership percentage.





Liquidity and Capital Resources





As of June 30, 2002, we had $455.4 million in cash and investments as compared to $508.3 million as of
December 31, 2001. The decrease in cash and investments during the first six months of 2002 of $52.9 million was primarily a result of additional operating losses in support of our research and development activities, acquisitions of additional
property and equipment and payment of interest to the holders of our convertible subordinated debt. We have financed our operations since inception primarily through public offerings, our convertible subordinated debt offering, revenues received
under our collaborative research agreements, private placements of equity securities, government grants and capital leases. As of June 30, 2002, we had recognized $89.3 million of cumulative sponsored research revenues from collaborative research
agreements and government grants. To date, inflation has not had a material effect on our business.





Our cash
investing activities have consisted primarily of acquisitions of equipment and expenditures for leasehold improvements. At June 30, 2002, our gross investment in lab and office equipment, computers, land and leasehold improvements since inception
was $54.5 million. At June 30, 2002, equipment with a gross book value of $10.1 million secured our equipment financing facilities. We anticipate that we will use net proceeds of a minimum of $15.0 million from equipment financing for capital
expenditures over the next year, primarily for the purchase of additional equipment and for improvements at our laboratories. We had approximately $2.3 million in material commitments for capital expenditures at June 30, 2002.





In accordance with our investment policy, we are utilizing the following investment objectives for cash and investments: (1)
investment decisions are made with the expectation of minimum risk of principal loss, even with a




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modest penalty in yield; (2) appropriate cash balances and related short-term funds are maintained for immediate liquidity needs, and appropriate liquidity is available for medium-term cash
needs; and (3) maximum after-tax yield is achieved.





Cash Flows For The Six Months Ended June 30, 2002





Operating Activities.    Net cash used in operating activities was $38.2 million
for the six months ended June 30, 2002 and was primarily due to the net cash loss from operations and increases in income taxes receivable of $1.0 million, prepaid expenses of $0.4 million, accrued expenses of $0.9 million and deferred revenue
of $0.5 million, offset by a decrease in other current assets of $0.3 million.





Investing
Activities.    Net cash used in investing activities was $104.2 million for the six months ended June 30, 2002 and was primarily due to acquisitions of property and equipment of $15.0 million offset by net outflows from
purchases and maturities of short-term investments and marketable securities of $88.0 million.





Financing
Activities.     Net cash used in financing activities was $0.8 million for the six months ended June 30, 2002 and primarily included payments on capital lease obligations of $1.6 million, offset by proceeds from
exercises of stock options in the amount of $0.8 million.





Future Liquidity





Sources of Liquidity.    During the remainder of 2002, we expect to fund our operations through a combination
of the following sources: cash and investment balances; collaboration revenue; gross interest income; equipment financing for capital expenditures; draw-downs on our collaborator loan facility; tax benefits from the State of Connecticut; and stock
option exercises.





Uses of Liquidity.    Throughout 2002, we plan to continue
making substantial investments in our emerging preclinical and clinical drug pipeline. In that regard, we foresee the following as significant uses of liquidity: research and development expenses; general and administrative expenses; gross interest
expense; and, facilities and equipment costs.





We believe that our existing cash and investment balances and other
sources of liquidity will be sufficient to meet our requirements through the end of 2002. We consider our expenditures to be crucial to our future success and by continuing to make strategic investments in research and development, we believe that
we are building substantial value for our shareholders.While we will continue to explore alternate sources for financing our business activities, including the possibility of public and/or private offerings of our securities, we cannot
assure that in the future these sources of liquidity will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources,
including contribution by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under development.





Minority Interest in Subsidiary





As of June 30, 2002,
minority interest in subsidiary was $12.3 million. Minority interest in subsidiary is related to the establishment of 454, our majority-owned subsidiary, during 2000 and reflects the initial minority shareholders capitalization less a gain
recognition of $3.9 million as a result of our contribution of technology to 454, and less the minority shareholders portion of various expenses incurred to date. The loss attributed to our minority ownership in 454 is expected to continue to
increase during 2002 as 454 increases its expenditures associated with technology development.




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Certain Factors That May Affect Results of Operations





This report contains forward-looking statements that are subject to certain risks and uncertainties. These include statements regarding:
(i) our ability to apply proprietary functional genomic technologies, bioinformatic systems, and disease expertise to discover genes and proteins, and to determine how these genes and proteins function in the context of disease, (ii) our expectation
that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial, (iii) the ability of our subsidiary, 454 Corporation, to commercialize products upon their development and create a future source of revenues for us,
(iv) our expectation that capitalized costs related to successful patent applications will be amortized over a period not to exceed twenty years using the straight-line method, (v) the expected application of APB 25 to our stock based compensation
awards to employees, (vi) our expectation that second half of 2002 collaborative revenues will decrease slightly from corresponding 2001 levels, (vii) our expected gross interest expense will increase slightly in the second half of 2002 in
conjunction with the anticipated equipment financing for capital expenditures, (viii) our income tax benefit and receivable for 2001 and 2002, as we incur additional qualifying research and development costs, (ix) our use of net proceeds of a
minimum of $15.0 million from equipment financing for capital expenditures over the next year, (x) our ability to fund our operations through a combination of sources during 2002 and to make substantial investments in our emerging preclinical and
clinical drug pipeline, (xi) our belief that our sources of liquidity will be sufficient to meet our requirements through the end of 2002, and (xii) the increased loss attributed to our minority ownership in 454 during 2002 as it increases
expenditures associated with technology development. Such statements are based on our managements current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result
of various factors, including, but not limited to, the following: our stage of development as a genomics based pharmaceutical company, uncertainties of clinical trials, government regulation and healthcare reform, technological uncertainty and
product development risks, product liability exposure, uncertainty of additional funding, our history of incurring losses and the uncertainty of achieving profitability, reliance on research collaborations and strategic alliances, competition, our
ability to protect our patents and proprietary rights, and uncertainties relating to commercialization rights. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001 for a more detailed description of these risks.
We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.







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Part II - Other Information





Item 4.    Submission of Matters to a Vote of Security Holders





We held our annual
meeting of shareholders on May 15, 2002, and the following matters were voted on at that meeting:





1.    The election
of John H. Forsgren and Robert E. Patricelli as Class I Directors, to serve for a three-year term of office or until their respective successors have been elected. The following chart shows the number of votes cast for the nominees as well as the
number of broker nonvotes:





DIRECTOR

FOR

WITHHELD

BROKER NONVOTESJohn H. Forsgren

42,532,944

230,101

N/ARobert E. Patricelli

42,532,944

230,101

N/A





Our current Directors are Ronald M. Cresswell, Ph.D., Vincent T. DeVita, Jr., M.D., David
R. Ebsworth, Ph.D., John H. Forsgren, Robert E. Patricelli, Jonathan M. Rothberg, Ph.D. and Patrick J. Zenner.





|Item |  | 6.    Exhibits and Reports on Form 8-K
|---- |  | --------------------------------------




A.    Exhibits





Exhibit 10.1Employment Agreement, dated May 20, 2002, between the Registrant and Michael P. McKenna





Exhibit 10.2Employment Agreement, dated May 20, 2002, between the Registrant and John E. Murphy





Exhibit 10.3Employment Agreement, dated May 20, 2002, between the Registrant and Elizabeth A. Whayland





Exhibit 99.1Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code)





B.    Reports on Form 8-K





On April 11, 2002, we filed a report on Form 8-K announcing that we had discovered a gene that codes for a protein capable of
inhibiting angiogenesis, one of the primary mechanisms of cancer that contributes to tumor cell growth. In addition, the report stated that our scientists are investigating this protein as a potential therapeutic to inhibit angiogenesis for the
treatment of cancer.





On May 3, 2002, we filed a report on Form 8-K announcing that CuraGen and Abgenix
scientists have successfully developed highly-specific, fully human monoclonal antibodies that precisely bind to PDGF D, a member of the Platelet-Derived Growth Factor family.





On May 22, 2002, we filed a report on Form 8-K announcing that CG53135, a novel protein discovered by our scientists, significantly reduces the severity and extent of
tissue damage associated with inflammatory bowel disease in several disease models.







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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Dated: August 9, 2002


CuraGen Corporation





By: /s/ Jonathan M. Rothberg, Ph.D.


Jonathan M. Rothberg, Ph.D.


Chief Executive Officer, President and


Chairman of the Board





By: /s/ David M. Wurzer


David M. Wurzer


Executive Vice-President, Chief Financial
Officer and Treasurer (principal financial and accounting officer of the registrant)




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